Many times though, the small business owner that is being defrauded isn’t aware that he or she even makes enough money to be stolen. So fraud isn’t an issue that is even close to the forefront in their mind. How can you be sure that you aren’t being taken advantage of? You can look for the following signs that a fraud is being committed.
(And please remember that while these signs may be an indication that there is a fraud occurring, that there may be another explanation for these signs being present, in addition, that the way in which you conduct the investigation, or confront the suspected party could add insult to injury by giving the culprit an opportunity to steal from you {again} in the court room with a frivolous lawsuit. So please find your local Certified Fraud Examiner and inquire about their services.)
1. Your Cost of Goods Sold
Despite the volume of business remaining constant or even increasing, it seems that expenses seem to increase unexplainably. These “expenses” are then ascribed to services or other hard to verify accounts. In today's economy gas is an ever flexing expense. There are periods of sharp increases and smaller decreases. But not counting the expenses such as gas or other volatile materials if it is increasingly costing more for you to sell the same amount of goods, then there could be a serious problem going on.
2. Your Devoted Employee
The good friend you have in your bookkeeper refuses to take a vacation or a day off and insists on doing more than is asked when it comes to duties assigned. Without proper internal controls, a ‘one-person’ bookkeeping system leads to blatant fraud that is easy to commit and to cover up on a temporary basis. More fraud is discovered accidentally when the culprit is forced to stay home by illness or another reason. If you have one of these employees, you either have an extremely devoted employee, or you have someone with something to hide.
3. Ghost Employees
You have the same number of employees, and yet payroll seems to increase beyond what you remember it being. Sometimes a fraudster will set up what is called “ghost employees”, and they can be former employees that no longer work there, friends or relatives of the fraudster or entirely fictional people all set up to be paid as if they were actually there working for you. Sometimes these unscrupulous individuals set up ways to continue to get paid even after they have been fired or have quit. (But that's another article.)
4. Kickbacks or Loyal Vendors
You have vendors and or customers who refuse to deal with anyone except the one individual they have been dealing with. I remember working for one store owner who was pleased that some customers would walk out or wait for 'Nick' to arrive and he thought it was so wonderful that these customers would be so "loyal" to someone who works for him. That was until I revealed that it was more likely that 'nick' was giving 'extras' to these customers and getting 'extras' from the vendors.
5. Customers Calling about Late Applied Payments
Customers call complaining that their payments are being applied to their accounts late or not at all. Someone pays their bill on the first of the month, but the payment isn't applied to their account until the fifteenth. This could be that your mailman is really slow, or this could indicate a “lapping scheme”. This is how it works: Employee converts and uses the payment for Customer A for his own purposes. The payment for Customer B then comes in and he applies that payment to A, then C pays his bill and the employee uses C's payment to cover B's account, etc. Eventually it collapses, but it can continue for a long time until the employee gets greedy and begins taking more payments than applying them. If the same employee has control over the General Ledger too, the Lapping Scheme can occur indefinitely as he or she can cover the tracks of missing payments by 'losing' the invoices entirely.
6. Vendors Call About Receiving Two Checks for the Same Invoice.
Vendors call wondering why they are receiving two checks for payment instead of one. This could indicate what is called a ‘pay and return’ scheme. This is how it works: the employee in charge of sending payments makes out two checks to the same vendor for the same amount on subsequent checks. Once the books reflect the missing payment, the employee will call and apologize about the two checks and request that one get sent back, which they will then intercept and convert to their own use.
7. Costs for Materials Increases and You See Some New Vendors
Your costs for materials rise unexplainably. This is a similar result to Number One above but accomplished through a more devious means. There may very well be other explanations for this but if you have what is known as a “pass through” scheme that is when the employee in charge of ordering parts, or materials takes the initiative to form a corporation (usually called a shell company) from which he will buy from your vendors that materials you are buying now and sell the same materials back to you at a slightly increased per unit cost. After a while, it adds up. A lot of times the employee will have left years earlier, and if no one updates or checks the validity of the vendor list, the 'retired' employee will continue to receive income from his many "shell" companies he or she set up before leaving.
8. New Faces and Loitering Friends
New faces seem to loiter all day around your newly hired employee. This happens occasionally and there is often no worry, but sometimes that employee is giving discounts, free merchandise or pretending to ring up orders and take money for merchandise when he is really allowing friends to rob you blind. Sometimes, it's just a kid excited about having his first job, sometimes it's something else entirely.
Conclusion
Remember that the way you handle this matter will in a large part determine your success in recovering what was lost. It may or may not be possible. It is usually best to contact your local Certified Fraud Examiner. CFE's do a lot of traveling as well but there is probably one locally that you could consult about your individual situation. If you are in the state of Florida, Homesoon Accounting Services can help you. We have a Certified Quickbooks Pro Advisor, David Roberts, expert in using Quickbooks to help find fraud. Call 407-968-5241 for a consultation.
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